Cartoon of the Day: Beijing Brings Out The Dragon!

"After making up a 7.0 GDP number in Q2, the Chinese have quite publicly landed on their head. And, as you’re all accustomed to by now, the only ideological central-plan for that in this day and age is a currency devaluation..."

SHAK | PLANTING FLAGS

SHAK may be the second coming in the hamburger space, but its valuation reflects its superior status as a public company. That being said, I’m not telling you something you don’t already know.

I’m an old school restaurant analyst and I can’t get past what I see as a classic mistake being made by the management team. Instead of taking the conservative approach of building out its new units with a geographic concentration that allows for SHAK to maintain economies of scale and building brand awareness, management has gone the route that has been the death of nearly every concept that has tried. By opening stores in vast geographic locations, it’s nearly impossible for the young company to maintain its high standards of execution which make up the current brand cache!

This strategy is more commonly known as planting flags. With only 71 stores opened, if SHAK is successful with the current real estate strategy of planting flags globally, it would be the first company I have ever followed to successfully create shareholder value in this way. Of the 71 stores, there are 29 licensed SHAK’s opened in 8 different international countries.

So that makes the SHAK empire currently operating in 13 states and 8 countries! Amazing stuff for such a young company. In a consumer business in which maintaining brand integrity is critical, SHAK is pushing the envelope on growth making that integrity very hard to maintain.

Importantly, the company is not slowing down the aggressive geographic expansion. In 2Q15 the newest state the company added to the list is the first unit in Texas. Over the past year it has opened units in New York, New Jersey, Illinois and Florida. In 2016, the company plans to open new units in two new states, California and Arizona.

OTHER THINGS TO CONSIDER:

AGGRESSIVE PRICE INCREASES - Same-store sales increased 12.9% in 2Q15 versus a 4.5% last year. This consisted of a 4.3% increase in traffic, combined with an 8.6% increase in price and mix.

HEDGEYE- In a raging bull market, operating most of your stores in NYC, the company might be able to get away with this. Clearly, this is not sustainable and is inflating the margin structure of the company. What do you think will happen to margins when traffic slows and management needs to be more promotional?

LIMITED INFORMATION – In an unusual move for any restaurant company the comparable Shack store base includes only those Shacks that are open for 24 months or longer. Of course management feels that this “is the best comparison given the long honeymoon periods at our new Shacks.” A comp is a comp by the way! Therefore, the comparable Shack base in the second quarter of 2015 included only 16 Shacks compared to only 10 Shacks in the second quarter of 2014 in which NYC represents 37% and 60% of the comp base, respectively.

HEDGEYE– Until we see more stores enter the comp base in non-core markets, will we see how the company is really performing. Given the two year lag on getting stores in the base it could be an extended period. Two years is a long time and anything can happen to the brand status with consumers.

SIGN OF THINGS TO COME – Since-same store sales will provide only limited analysis on the company’s performance, average weekly sales will be more of a focus over time. In 2Q15, average weekly sales for domestic company-operated Shacks increased 7.4% to $102,000 for 2Q15 from $95,000 last year. This growth was significantly below the 2Q15 12.9% same-store sales figure. Additionally, average weekly sales figures were driven higher by menu price increases and the Las Vegas unit opening in 2H14.

HEDGEYE- I can only imagine what AUV’s would look like without the Las Vegas store. I suspect Joe day trader and the media don realize that average weekly sales over the long-term will be in a secular decline!

880.HK - Angela Leong On Kei, executive director of SJM Holdings Ltd., says the company has not considered more cost-cutting measures despite the city’s 14-month decline in gross gaming revenues. “For other gaming companies, I still cannot see it [more cost-cutting measures] being introduced,” Ms. Leong remarked yesterday.

Digital Key now gives frequent guests the option to bypass the hotel check-in counter and access their rooms, as well as any other area of the hotel that requires a key, directly via the Hilton HHonors app on their smartphones.

By early 2016, HHonors members will be able to use their smartphones as their room key to enter more than 170,000 rooms at 250 U.S. properties within the Hilton Hotels & Resorts, Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts and Canopy by Hilton brands.

NLCH - Announced yesterday the launch of a secondary public offering of 20 million of its ordinary shares by certain funds affiliated with Apollo Global Management, LLC, Star NCLC Holdings Ltd. and certain funds affiliated with TPG Global, LLC. NCLH will not sell any ordinary shares in the offering and will not receive any of the proceeds from the offering. The offering is pricing at $59.25.

Takeaway: Their last offering in May was also for 20 million shares. Apollo, Star NCLC, and TPG have now reduced their ownership positions to 17.1%, 13.3%, and 2.3% respectively. We anticipate more secondaries in the future.

CCL - announced that its new social media Internet packages, which are now available on more than half of its ships, are scheduled to be implemented fleetwide by the first quarter of 2016.

The packages offer access to a variety of popular websites for $5 per day.

Additionally, the line’s new mobile app – currently available on Carnival Breeze and offering a new “chat” feature – has been well received, with a third of the ship’s guests actively using the app during their cruise, Carnival said.

The app is expected to be available on five additional ships by the end of the year and be fleetwide by summer 2016.

Currently available on 13 ships, Carnival’s enhanced Internet access offers increased bandwidth and speed, while the social media package provides unlimited access to Twitter, Facebook, Instagram, Snapchat, LinkedIn, Pinterest and other popular sites for $5 per day, with discounted plans available for the entire cruise.

PENN MANAGEMENT MEETING AT PLAINRIDGE

Hedgeye is hosting a visit to PENN’s Plainridge Casino in Plainville, MA on Friday August 28th at 10am. We will meet with PENN’s COO Jay Snowden and Plainridge’s GM Lance George and tour the facility as well. As you know, Plainridge is a big growth driver for PENN and could contribute an estimated 15% of the company’s property EBITDA in 2H 2015.

Following the PENN meetings, we will drive over to visit Plainridge’s primary competitor, the Twin River casino in Lincoln, RI, about 30 minutes away.

Please let Todd Jordan or your Hedgeye salesperson know if you are interested in attending. Thanks.

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08/11/15 09:02 AM EDT

LNCE | GOING IN LONG

TAKEAWAY: We view LNCE as a high quality, small cap name in the Consumer Staples space. The company’s brands are well positioned in the snacking category to allow for sustainable volume growth and margin expansion for the next 3-5 years.

Snyder’s-Lance (LNCE) reported 2Q15 numbers yesterday after the close that beat the street on both the top and bottom line. As a result of this beat and a strong outlook for the next 12-18 months, we are raising LNCE up to the Hedgeye Consumer Staples Best Ideas list as a LONG.

We will dive deeper into this idea next Wednesday, August 19th at 11:00am ET when we present our Black Book on LNCE. Formal invite and details will follow later today.

HEDGEYE OPINION

Snyder’s-Lance is a leader in the snacking category, their portfolio of brands is something that actually brings people to the center-of-the store. It is exciting to see the innovation they are implementing across the top brands as well as driving growth through increased distribution. There is still plenty of white space out there that LNCE can fill as they expand their operations. In early analysis we see 25%+ upside in the name, as we are confident the team can continue to grow organically, as well as acquire fast growing snacking brands to plug into their DSD network.

EARNINGS

As previously noted LNCE beat the street on both the top and bottom line. Reporting net sales of $431.4mm versus consensus estimates of $430.2mm and operating income of $32.3mm versus consensus of $31.0mm. In the quarter, management improved their operating margin by 50bps, as they leveraged the manufacturing footprint and continue to streamline operations. Moving down to EPS, LNCE beat the street by a penny, posting $0.27 versus estimates of $0.26. The great financial performance was coupled with impressive share gains by all of the core brands, which include; Snyder’s of Hanover, Lance, Cape Cod, Pretzel Crisps and Late July.

INNOVATION & EXPANSION

Innovation is a key source of growth, and they are showing their brands can expand well across categories. Cape Cod’s early days in RTE popcorn are proving to be positive, and they are spreading innovation across better for you snacking all the way to premium snacks. Seeing these actions shows they are most likely casting a wide net across the space when looking at possible M&A targets. At first thought, Popcorn Indiana, Angie’s, KIND Snacks, Justin’s and thinkThin jump to mind as possible targets.

In 2Q15, LNCE’s core brands net sales grew an impressive, 9.1%, with volume up 10% and increasing market share across the board. But there is still plenty of more room as they enter different channels. LNCE just recently entered e-commerce, it is growing well for them and expanding as their products cater well to this platform. Drug channel and C-store are also areas to improve as they are in most location but sometimes with just Lance or just Cape Cod, and management’s goal is to get broad distribution across all brands.

INVESTMENTS IN THE BUSINESS

From 2012 to 2014 LNCE spent $227mm on capital expenditures to update the manufacturing footprint and streamline the business. This was ~72% more than the previous three year period, as it was time to update manufacturing lines and infrastructure to improve efficiencies. Now that this spend has begun to taper off, they can focus their cash on growing the business. For starters they have updated their packaging across the core brands to increase consumer appeal on the shelf. They have also ramped up marketing spend both digital and media, to get in front of the consumer and drive awareness and trial of new products and old staples.

PORTFOLIO SHIFT

Just about one year ago on June 30, 2014, LNCE closed the deal to divest their private label business, which included two manufacturing facilities in the U.S. and Canada. Shearer’s Foods a subsidiary of Wind Point Partners purchased the business for $430mm. The private label business accounted for $287.8mm in net revenue in FY2013, 16.4% of the companies then $1.76bn in total net revenue. This was an important step for LNCE management, which allows them to focus 100% of their attention on the branded portfolio. Freed up cash to be put to better use on innovation and expanding the core branded portfolio of brands. As LNCE is lapping the one year mark of divesting this business the company is looking stronger than ever, very focused on growth and innovation.

MANAGEMENTS GUIDANCE

Management did not change guidance for 2015, they are still shooting for net revenues for the full year of $1.69 to $1.72 billion. The earnings per diluted share estimate range also remains at $1.11 to $1.19 and capital expenditures to be between $60 and $62 million.

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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